MULTIBAGGER STOCK - CERA SANITARY

Cera Sanitaryware Ltd NSE Code – CERA

Cera, a Gujarat-based company, was established in 1980 as Madhusudan Industries Ltd. As a part of restructuring of the business in November 2002, the sanitaryware division was demerged and was named Cera Sanitaryware Ltd.

Cera is the third largest sanitary ware company in India and has a 20%+ market share. The company is engaged in the manufacturing of ceramic wash basins, wash basin pedestals, bidets, water closet pans, flushing cisterns, urinals and similar sanitary fixtures etc.

Cera has also launched its Cera Bath Studios and Galleries in various parts of the country to cater to the premium sanitaryware segment. The company’s marketing activities take place through regional offices at Bangalore, Mumbai, Pune, Chandigarh, Chennai, Cochin, Delhi, Hyderabad, and Kolkata; it has a marketing network of 500 dealers and 5,000 retailers spread across the country.

Cera Sanitaryware – Key Investment Highlights

Strong Brand Equity – In the sanitary ware segment, there’s a strong brand identity against that in Tiles segment. At present there are only three major players i.e. HSIL, Parryware Roca and Cera. Cera’s achievement of 20% + market share is commendable in the light of the fact that Cera started almost 20 years later than HSIL and 30 years later than Parryware.

Strong Marketing & Distribution network – Cera sells its products through a marketing network of 500 dealers and 5000 retailers spread across the country. It’s difficult to replicate such a network and is one of the major business moats for Cera against the onslaught from foreign players and other local players.

Relatively slowly changing industry – It’s a relatively slow changing business (makes it easier for us to hold it for long term in comparison to education or technology stocks where the trends change very fast and thus a company doing well today may end up on a losing side in a very short period of time).

No Institutional holding – There’s no institutional holding in Cera, probably because of low liquidity. We believe the company is still out of sight of smart investors. Once they come to the party, the stock can get re-rated to higher PE multiples. At present the stock is quoting at 8.5 times trailing twelve months earnings.

In a sweet spot – We find Cera in a very sweet spot where they have been generating good cash flows from operations (almost in line with earnings) and have been able to deploy capital at good returns.

Very attractive valuations – Murugappa group sold of their 47% stake in Parryware-Roca joint venture in 2008 for a sum of Rs 720 crore while the company had recorded a turnover of Rs 360 crore for FY 08, thus valuing the company at 4 times its annual turnover. Cera’s market cap is approximately equal to its annual sales. Though not 4 times, however Cera can still get re-rated to twice the annual sales considering its efficiency and growth.